Essays on price dispersion

Cemil Selcuk, Purdue University


In Chapter 1 we study price determination in a market with n identical buyers and a seller who initially commits to some capacity. Sales are sequential and each price is determined by strategic bargaining. A unique subgame perfect equilibrium exists. It is characterized by absence of costly bargaining delays and each trade is settled at a different price. Prices increase with n and fall in the seller's capacity, so if buyers have significant bargaining power, then the seller will strategically constrain capacity to less than n. Thus, despite the efficiency of the bargaining solution, certain distributions of bargaining powers give rise to an allocative ineffciency. In Chapter 2 we model a market where identical buyers direct their search to identical capacity-constrained sellers. Sellers cannot fully commit to the list price so strategic bargaining may determine the sale price. We study search and pricing behavior in symmetric equilibrium. Sale prices exhibit equilibrium dispersion as they respond naturally to local demand conditions. Uncoordinated search decisions lead to equilibrium demand heterogeneity, so sellers realizing large demand bargain prices up. We characterize the sale price distribution parametrically, studying how different commitment limitations and market features affect pricing and surplus shares. We also determine endogenously the pricing institution. Implications for labor and goods markets are explored. In Chapter 3, we endogenize the choice of inventory in a directed search economy, where identical sellers compete to attract identical buyers. Sellers costlessly advertise their capacities and then buyers visit stores. Sale prices at a store are determined via a multi-player strategic bargaining game, and are affected by the inventory and realized demand at the store. Sellers can advertise a low capacity to improve their bargaining power but doing so hurts their attractiveness, relative to competitors who announce a high capacity. This gives rise to multiple symmetric equilibria with high or low capacities. In case of multiple equilibria, we demonstrate the one with lowest capacity yields the highest payoff to sellers.




Camera, Purdue University.

Subject Area

Economics|Economic theory

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